FIGURE 24-1
-Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output Y*), is
A) an increase in personal income taxes.
B) a reduction in government purchases of goods and services.
C) an increase in corporate income taxes.
D) an increase in government purchases.
E) an increase in interest rates to encourage increased saving.

Question

FIGURE 24-1
-Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output Y*), is
A) an increase in personal income taxes. 
B) a reduction in government purchases of goods and services. 
C) an increase in corporate income taxes. 
D) an increase in government purchases. 
E) an increase in interest rates to encourage increased saving.

Quizplus · Accepted Answer

To attain potential output Y*, the government needs to increase spending to shift the aggregate demand curve to the right. Therefore, an increase in government purchases is the appropriate fiscal policy response. A reduction in government purchases or an increase in taxes would decrease aggregate demand and hinder economic growth. Increasing interest rates to encourage increased saving would also decrease aggregate demand and hinder economic growth.

FIGURE 24-1 -Refer to Figure 24-1. Suppose the Economy Is Currently in Currently